Question

Q1. Accounting in the financial institutions has special characteristics compared to the non-financial institutions, discuss this statement and explain characteristics of balance sheets, income statement and cash flow statement in banks.

Answer 1

Solution:-

Accounting in the financial institutions has special characteristics compared to the non-financial institutions, discuss this statement:-

Bank acts as an intermediary between two parties. The job of a bank is to assist the company which it can help. Bank makes profits from the spread between the rate it receives and the rate it pays.

On the other hand, a company operates to produce goods or services and ultimately sell these goods or services to another business, end customer or to Government. The objective of running a regular company is to generate and maximise wealth for its shareholders.

Particulars	Bank	NBFC
Defination	Bank balance sheet is prepared as per the mandate by the regulatory authorities	Company's balance sheet is prepared as per the regulation of international accounting standards board (IASB).
Objective	The main objective is to showcase an accurate trade-off between bank's profit and risk.	The main objective is to reflect the accurate financial picture of an organization to the stakeholders.
Scope	The scope of bank's balance sheet is limited since it's applicable only for banks.	The scope of company balance sheet is much broader since it is applicable for all sorts of companies .
Equation	Assets = Liabilities + Shareholders' Equity (Banks's assets & liabilities are much different than any regular company)	Assets = Liabilities + Shareholders' Equity
Complexity	Preparation of balance sheet for a bank is quite complex since bank needs to calculate the net loans.	Preparation of company balance sheet is much simpler.
Time consumption	Bank's balance sheet needs a lot of time to prepare.	Company's balance sheet doesn't take a lot of time to prepare.

Characteristics of balance sheets, income statement and cash flow statement in banks:-

ncome Statement

Bank of America's income statement is below from their annual 10K for 2017. Here are the key areas of focus:

• Total interest earned was $57.5 billion (in green) for the bank from their loans and all investments and cash positions.
• Net interest income (in blue) totaled $44.6 billion for 2017 and is the income earned once expenses have been taken out of interest income. Again, net interest income is mostly comprised of the spread between interest earned from loans and the interest paid out to depositors.
• Non-interest income totaled $42.6 billion for 2017, and this income includes fee income for products and services. It's vital that banks diversify their revenue streams by earning income from non-interest rate related products to shield them from any negative moves in yields. Income under this category includes bank account and service fees, trust income, loan and mortgage fees, brokerage fees and wealth management services income, and income from trading operations. We can see that BofA's revenue is well balanced with roughly half of the bank's revenue coming from fee and service income.
• Net income of $18.2 billion is the profit earned by the bank for 2017.

Balance Sheet

Bank of America's balance sheet is below from their annual 10K for 2017.

There are three key areas of focus:

• Cash is cash held on deposit, and sometimes banks hold cash for other banks. BofA has roughly $157 billion in cash which is an important focus for investors that are hoping for the bank to increase its dividend or share buybacks.
• Securities are typically short-term investments that the bank earns a yield from that include U.S. Treasuries and government agencies.
• Loans are the bread and butter for most banks and are usually the largest asset on the balance sheet. BofA has $926 billion in loans. Investors monitor loan growth to determine whether a bank is increasing their loans and putting to use the bank's deposits to earn a favorable yield.
• Deposits are the largest liability for the bank and include money-market accounts, savings, and checking accounts. Both interest bearing and non-interest bearing accounts are included. Although deposits fall under liabilities, they are critical to the bank's ability to lend. If a bank doesn't have enough deposits, slower loan growth might result, or the bank might have to take on debt to meet loan demand which would be far more costly to service than the interest paid on deposits.